PARAMOUNT MORTGAGE - LENDER'S BLOG

February 13th, 2009 8:38 AM
Reporting in a recent online article, Les Christie of CNNMoney.com reveals the changing nature of mortgage lending. Long gone are the days of sub-prime loans with no proof of income and low credit standards.

Today, buyers looking for a traditional mortgage are now faced with a different set of factors to consider.

Paying Up-Front Points

Many buyers can develop "interest rate envy" by fixating on a specific interest rate and refusing to yield to the prevailing market conditions. When rates continue to go against them and they still can't decide, there is one solution that can break their mental deadlock.

Borrowers can pay points - one-time, up-front fees - to reduce their mortgage's interest rate over the life of the loan. One point represents 1% of the mortgage value.

Traditionally, buyers often assume that they should never pay points, according to Alan Rosenbaum, founder of mortgage broker Guardhill Financial. That could be a mistake.

The old rule of thumb was that paying one point at closing could lower their mortgage's interest rate by a quarter percentage point or so.

But now borrowers can get a lot more bang for their buck. "Today the spread is worth a half point to a full point on the rate," stated Rosenbaum.

When interest rates were high, paying points didn't make sense because borrowers were very likely to refinance after rates dropped. They wouldn't hold their original loans long enough to recoup their up-front costs.
Paying $2,000 more on a $200,000 mortgage at closing can shave as much as a whole percentage point off the loan's interest rate. Reducing a 6% loan to a 5% loan by paying upfront points would save $126 a month and pay for itself in 16 months. Even if the rate were only lowered to 5.5%, that would still save $64 a month, paying for itself in 32 months.

Still, not everyone is convinced. Rosenbaum recently had a client who chose a 15-year fixed rate loan at 5.875% with zero up-front points on a $800,000 loan, instead of paying a point to get a 5.375% loan.

Had the borrower chosen to pay that point, he would have recouped that cost in about three years, and then gone on to save more than $200 a month for the remaining 12 years of the loan.

Buyers who are planning to refinance or sell within a few years shouldn't consider this strategy since it doesn't pay in the short term.

 


Posted by Customer Service on February 13th, 2009 8:38 AMPost a Comment (0)
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